What Are The Common Anomalies Which A Trader Should Know?

When a stock doesn’t perform as it was assumed, it is called a market anomaly. Generally, a price or rate of return is estimated for stocks, but there are times when the efficient market hypothesis (EMH) contradicts and this distortion is known as a market anomaly.

At MAXX Markets, traders study the anomalies so that they can work their way around them. The anomalies enable the traders and others to gauge the market movements and adjust their trading strategies accordingly. If you look at the common anomalies, then you will know that some are consistent and some of them appears once and then disappears. For more latest news and tips you can also go through some of popular sites in these niche such as B-Finance.

Now, let’s take a look at some of the common market anomalies-

1. The January Effect

The January Effect, also known as a turn-of-the-year effect, is the pattern where the stocks of a small company tend to outperform the market within the first quarter of January. During the last week of December and the first week of January, the share prices are high so the trading volume also increases. During this January anomaly, the small companies tend to outperform the market.

In December, the traders realize their capital gains by selling off the assets and due to this reason, the price starts dropping. The buyers don’t want to get involved in the tax selling so they prefer to wait till January. According to MAXX Markets, January is assumed to be a good time to buy stocks. Not always does it happen that the loss incurred during December is turned into a profitable one in January, but generally, this is the trend.

There are different explanations for this Monday effect. Some blame it on the pessimistic approach of the investors on the Mondays, whereas, others suggests that over the weekend several companies report negative earnings and that affects the stocks on Mondays.

MAXX Markets are fully aware of the Monday Effect so they strategize their trading accordingly.

3. Holiday effect

This is the time just before the stock market is going to shut down for holidays. Everybody is optimistic around the holiday period and it translates into an optimistic market movement. There could be another way of looking at the holiday effect and that is related to the short seller.

Just prior to the holidays, the short sellers close their positions mostly and this might also be a genuine reason for the holiday effect.

4. Turn of the month effect

This anomaly suggests that the stock rises towards the end of the month and the same rise is also reported during the commencement of the next month. A possible explanation for this anomaly can be the salary.

Mostly, people receive their salary during the end of the month and it’s the time when they have the potential to invest in the market as well. This initiates the rise in stock prices.

These are some of the common anomalies, which the traders should be aware of while trading. The stock market is extremely volatile and no historical patterns can be relied upon completely for future performances.